By Nancy Johnshoy, CFA, Portfolio Manager & Market Strategist
As we have said many times, the coronavirus and the economy are very closely linked. Full economic recovery is likely not possible without an effective, widely available vaccine. News on November 9 of very promising and concrete developments on the vaccine front fueled a huge market rally that has actually been underway for several trading sessions. The so-called “COVID cyclical” stocks, those sectors that have languished in favor of the “stay at home – work at home” theme, got a big boost as investors contemplated the huge pent up demand for travel and entertainment. Monday’s increase of 3.26% in the S&P 500 brings our year-to-date total return to 11.63%. That would be a pretty good result in any normal year, let alone in 2020 with its seemingly endless supply of challenges.
Let’s back up and recap what has occurred since our Third Quarter Market Review. We learned on October 29 that the U.S. economy grew by an annualized rate of 33.1% in the third quarter. This historic rebound came after a record-breaking decline of -31.4% in Q2. Economic data points to a continued recovery in many areas of the economy, including manufacturing, housing, consumer spending, and employment. It is important, however, to note that we are not by any means back to square one. Real GDP was $19.3 trillion at the end of 2019. It fell by $2 trillion during the pandemic and we rebounded by $1.3 trillion in Q3. This leaves us $700 billion in growth needed to regain our former peak. Estimates are for real GDP to grow at a rate of roughly 3% going forward although a vaccine could provide another much-needed boost.
The latest unemployment numbers from October reflect continued improvement in the jobs situation. From an April peak of 14.7% unemployment, we have now declined to 6.9%. (chart below) To date, we have regained 12.1 million of the 22.2 million jobs lost during the Great Lockdown. Despite improvement, there remain 11.1 million unemployed and the pace of recovery is likely to slow. Jobs lost in some areas most impacted by the pandemic, leisure and hospitality and state and local government for example, will be difficult to recoup while we continue to struggle with rising COVID-19 cases.
The United States passed a grim milestone this week with 10 million cases of COVID-19. Alarmingly, the 10 million mark was reached a mere ten days after we surpassed 9 million cases. Indeed, we have seen a significant acceleration globally in the 7-day moving average of confirmed cases. The global infection rate now surpasses 50 million cases. Many areas in Europe have initiated a second lockdown in the face of rising infection rates. The good news there is that Lockdown 2.0 is likely to have a less severe impact on economic activity. News of a promising vaccine could not come at a better time and part of the accompanying market rally is the collective relief we all feel.
By the way, we also had a Presidential election last week. Voter turnout was higher than for any election in the last 100 years. Announcement of results was confounded by a high number of mail-in and absentee voting due to the pandemic. While the election results at this time remain contested, it is assumed that Joe Biden will be the 46th President of the United States. With four races still undecided, the U.S. Senate is locked in a dead heat with 48 seats held by each party. Georgia will hold two runoff Senate elections on January 5, determining which party controls the Senate. Odds currently favor a Republican-controlled Senate, pointing to a government structure shared between Republicans and Democrats. This “gridlock” will make certain policy changes, like tax increases, less likely. This is thought to be at least a part of the reason why markets rallied strongly following the election. It is thought that Chairman Powell will remain at the helm of the Federal Reserve so the approach to monetary policy will not change. One the other hand, the high probability of a COVID-19 vaccine will likely reduce the size of a future COVID aid package.
By no means is the eight-month nightmare that has been COVID-19 at an end. However, with a vaccine in play that reports a better than 90% success rate in trials, possibly the light we see at the end of the tunnel is not an oncoming train. As always, our investment team remains focused on our clients’ priorities that are unique to them, and the time-tested strategies for navigating through challenging market environments.
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